RONGTAI INDUSTRY(605133)INITIATION：A LIGHT-WEIGHTING “HIDDEN CHAMPION” RIDING THE TREND OF NEV DEVELOPMENT

Rongtai is a domestic “hidden champion” in the high-pressure aluminum alloy die-casting field, with a share of more than 21% in global electric power steering (EPS) gearbox market. Riding the trend of the development in new energy vehicles (NEVs), the Company has tapped the electrical, instrumentation and controls (EIC) system products market and entered into the segment of large-scale casting. The Company has become the designated supplier of the head NEV brands such as BYD, XPeng and so on. Meanwhile, production capacity of its Mexico plant ramps up rapidly, and the globalization is accelerating comprehensively. Given the Company’s leading steering system business, complete capacity coverage and smooth entry into new energy business, Rongtai presents a high growth visibility. We expect its 2022E/2023E/2024E EPS to be Rmb0.91/1.45/1.91. We give 25x 2023E PE to derive a target price of Rmb36 and initiate coverage with a “BUY” rating.
Focusing on automotive precision aluminum die-casting parts and supported by the world’s leading tier-1 supplier.
Rongtai is a domestic high-pressure aluminum die-casting leader with more than 20-year industry experience, and its products matrix covers a wide range of systems for steering, transmission and braking. The Company’s major customers include Bosch, ZF, ThyssenKrupp and so on, with a complete footprint across the globe. In 2021, its revenue from overseas business accounted for 35% of the total, with its subsidiary in Mexico taking up of 15%.
In 1-3Q22, the Company achieved revenue of Rmb1.06bn (+28.9% YoY) and attributable net profit (ANP) of Rmb91mn (+15.3% YoY). Rongtai has a clear and stable shareholding structure, with actual controllers holding a combined 66.9% of the Company’s shares. It released a share incentive plan recently with a total of 90 people, covering the middle management and core business staff, which will contribute to the stability of the Company’s talent pool, motivate technical and management personnel and help the Company’s performance development.
Rapid growth of auto light-weighting under the single-piece casting trend:
Increased penetration of new energy drives the acceleration of vehicle light-weighting. According to the International Automotive Lightweight Conference & Exhibition (ALCE), if the weight of pure electric vehicles (EVs) is reduced by 10%, the range will be increased by 5%-8% on average.
Compared with ordinary steel, aluminum alloy can reduce weight by 40% which will lead to a more significant effect, so it becomes the mainstream choice of material light-weighting. According to EMIS forecast, the size of China’s automotive aluminum die-casting industry in 2022 is about Rmb110.9bn. Based on the significant cost and weight reduction, the technology of the single-piece casting started by Tesla is setting off a revolution in automotive manufacturing and assembly process. We expect the penetration rate of this technology to reach 30% in 2030, which will likely lead to a global scale of Rmb246bn in the die-casting parts industry in 2030 (vs. Rmb2.2bn this year) based on a conservative estimate. There’s also an obvious trend towards larger box for electric drive systems, and many new energy brands are starting to adopt the “N-in-1” solution. In 7M22, the penetration rate of “three-/more-in-one” electric drive system has increased to 59.2%.
Continuously consolidate its leading edge in steering gearbox:
Rongtai’s automotive aluminum die-casting products are mainly concentrated in the steering system, with a market share of about 21.5% in 2021. Among the Company’s core customers, Bosch/ZF/Nexteer Automotive took up of 18.8%/17.5%/2.8% of the shares in the domestic passenger vehicle EPS market in 2021. Rongtai started to cooperate with Bosch on EPS gearbox as early as in 2011. With the long-term cooperation, the Company’s R&D capability has been continuously improved. Its relevant patents have reached 105 items, and the product moat has been deepened. Through the customer resources of Bosch and other customers, Rongtai’s products are used by the mainstream OEMs such as Volkswagen, Mercedes-Benz and BMW. The Company started to build capacity in Mexico in 2016 and gained sufficient experience on localization management and production operations. In 1H22, the Mexico subsidiary achieved net profit of Rmb12mn. At present, the subsidiary has obtained orders of pickup truck parts from ZF, Nexteer and so on, implying a successful entry into the commercial vehicle steering gearbox system market, which creates new incremental revenue growth for the Company. In Aug 2022, Rongtai acquired 53% shares of Lizhun Machinery Manufacturing and became the actual controller of the latter. The acquired company performed well with a net profit of Rmb21mn in 2021, and may form the synergy with its parent company to improve the operation efficiency.
Accelerated growth in new energy business:
Rongtai has now obtained new energy projects from BYD, XPeng, GWM and many other OEMs and successfully moves up from a tier-2 company after expansion in new energy market. On Aug 26, Rongtai announced its agreement with BYD on motor box development to provide electric drive system box for the latter’s e3.0 pure electric platform, which will likely bring an annualized revenue of about Rmb300mn with a further increase in revenue share of new energy business. With the development of single-piece die-casting, Rongtai has purchased three 9kt ultra-large die-casting units, which is likely to drive the development of the Company in the long run, riding the trend of single-piece casting development. The Company’s investment project is planned to start a full production by the end of the year, and the projects through convertible bonds with a total investment of approximately Rmb650mn will further increase the production capacity of 1.96mn aluminum alloy components when it reaches production. We believe that Rongtai is currently in the low output stage of the capital expenditure cycle, with the ratio of cumulative revenue growth to cumulative capital expenditure in 2021 being only 64.3%. It will likely achieve high speed development soon, and see rapid growth in revenue and a growing effect of scale.
Potential risks:
Weaker-than-expected controls on Covid; disappointing new business expansions; slower-than-expected progress investment projects; overseas business promotion missing expectations; new customer expansion not up to expectations.
Investment strategy:
Rongtai’s domestic market share of steering gearbox exceeded 21% in 2021.
Backed by deep cooperation with Bosch and other tier-1 partners, and continuous product power enhancement, the Company’s market share keeps increasing. It has marched into the overseas and pickup truck market, which contribute new increments. The Company has become the designated supplier for NEV projects of OEMs such as BYD and XPeng. It also smoothly entered into the EIC system products market and purchased 9kt die-casting machine to build presence in the one-piece casting segment in advance, which means its high potential for future revenue and performance growth.
Rongtai established capacity in Mexico as early as in 2016, reflecting a rich management experience. The capacity increased rapidly through the IPO proceeds and convertible loans, laying the foundation for the Company’s development. Given its leading steering system business, complete capacity coverage, and smooth entry into new energy business, Rongtai’s performance growth is highly visible. We expect its 2022E/2023E/2024E EPS to be Rmb0.91/1.45/1.91. Compared with the valuation of IKD (600933.SH), Ningbo Xusheng (603305.SH) and Tuopu Group (601689.SH), at 22x, 25x and 30x 2023E PE, respectively, based on CITICS earnings estimates, and considering the Company’s high earnings elasticity and visible fulfillment, we assign 25x 2023E PE to derive a target price of Rmb36 and initiate coverage with a “BUY” rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。